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What Commodities’ Outperformance Means for the Business Cycle

Surbhi Jain - Author
By

Nov. 20 2020, Updated 12:16 p.m. ET

JPMorgan led the recent financial sector rally

JPMorgan Chase (JPM) recently led the rally in the US stock market’s financial sector (XLF), which has risen ~5% over the past month as of April 22, 2016.

The company’s earnings report for the quarter ending March 2016 beat estimates with a 7.1% positive surprise. JPMorgan Chase rose 4% after its 1Q16 earnings.

“No one has the right to not assume that the business cycle will turn! Every five years or so, you have got to assume that something bad will happen,” said Jamie Dimon, chairman and CEO of JPMorgan Chase.

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Commodities are outperforming equities

What we’ve seen recently is a rally in commodity prices. On a YTD (year-to-date) basis, petroleum has risen 25% and metals have risen 11.8%—with copper up 10.8% and iron ore up 35%. Commodity trading advisers are even outperforming hedge funds.

The big question that’s started daunting investors is this: Will commodities continue to outperform equities?

Another question worth investigating is whether this rally is short-lived, or whether the current business cycle is in favor of commodities and the financial sector? Let’s take a look into the business cycle to assess where we are, what factors are currently at play, and what stands to work given current macroeconomic and policy influences.

Business cycle investing

In the series Business Cycle Investing: What Should You Look For? we discussed the importance and application of business cycles to your investing. We highlighted the leading, lagging, and coincident indicators that help to identify the current stage of the cycle. We also discussed sector investing and mentioned investment products that can be used to invest in specific sectors.

In this series …

In this series, we’ll take the discussion forward. We’ll also take a look at style investing, an approach that makes use of business cycles to identify appropriate equity market segments for investment.

As we move ahead in this series, we’ll share our perspective on the phase of the cycle that we’re currently in, talk about the sectors that are currently performing well (valuable to short-term investors), and talk about those sectors that should perform well (valuable to long-term value investors).

We’ll also discuss key recession risks and the macroeconomic and policy influences that are currently affecting the business cycle. We’ll conclude our analysis by providing an idea of what could work next for the US stock market (VFINX) (IWM) (QQQ).

Let’s begin by understanding the role played by global monetary policy in distorting the way we view our current position in the business cycle.

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